 Thank you for joining day two of the virtual Central Bank of the Future Conference. Our program will begin in five minutes with welcome remarks from Federal Reserve Bank of San Francisco head of supervision Tracy A. Bassenger. Good morning, good afternoon, and perhaps good evening in some places. Welcome to day two of the Central Bank of the Future Conference. For those of you who are just joining us today, I'm Tracy Bassenger, the head of supervision at the San Francisco Fed, and we're delighted to be co-hosting this conference with Michael Barr and Adrian Harris and their team at the University of Michigan. Our goal is to identify technology, business, and policy innovations that central banks can employ to better foster a more inclusive financial system and economy. Yesterday we had a great series of presentations focused on the role of monetary policy and economic inequality. The presenters explored how we might be bold and push the boundaries of today's monetary policy frameworks and tools to make a difference on economic inclusion. In particular, they challenged us to embrace innovation, to be fiercely impatient because the issues of inequity are so urgent, while also being patient and accepting incremental change given the magnitude of the issues. Our speakers also talked about the linkage between climate change and economic inequality, as well as the importance of consumer protection as we try to solve these problems. Today we'll shift and focus on payment systems and the global exploration of central bank digital currencies. We'll start with the keynote from Timothy Massade at the Harvard Kennedy School, who has a deep background in financial services. Then we'll have a panel on central banks evolving role in payment systems given technology advances, followed by a couple sessions on central bank digital currencies. The day will end with the fireside conversation between the director general of the People's Bank of China and Michael Barr. During these sessions you'll hear from a great lineup of speakers. Michael Barr will moderate the first panel that includes Tillman Airbag from Flourish Ventures, Andrea Dunlop from the Access Group, and Musajimo from the Central Bank of Nigeria. Daniel Gorfine from Gattica Horizons will then introduce us to central bank digital currencies followed by Christopher Brummer from the Georgetown Law School, moderating a panel that explores this topic. Participating in his panel will be Lisa Cook from Michigan State University, Christopher Giancarlo from Wilkie Farr Gallagher, Morgan Ricks from the Vanderbilt Law School, and Bejoi de Gupta with eCurrency. You can watch today's sessions live through the Engagement Hub or you can go to YouTube where you can pause at any time or view the sessions at a later date. The Engagement Hub is for registered attendees only and has the full agenda and additional resources for navigating the conference. There are also three breakout sessions for registered attendees that will be from one to two Pacific or four to five Eastern after our main session concludes for the day. Today's breakouts include a session on monetizing privacy, another one on the U.S. data infrastructure, and finally one on when financial inclusion falls short, a global perspective. If you haven't done so already, please do sign up for one of these sessions. As I mentioned, we'll start today with the keynote address from Timothy G. Massad, a senior fellow at the Harvard Kennedy School. Mr. Massad served as the chairman of the U.S. Commodity Futures Trading Commission from 2014 to 2017, where he oversaw that agency's implementation of the Dodd-Frank Act. Prior to that, he served as the Assistant Secretary for Financial Stability at the U.S. Treasury Department. Welcome, Mr. Massad. We look forward to your remarks. Okay. Good morning, good afternoon, good evening, wherever you are. Thank you, Tracy, for the introduction. And I also want to thank the University of Michigan Center on Finance Law and Policy, and the Federal Reserve Bank of San Francisco. And in particular, my former colleagues, Michael Barr and Adrian Harris, were inviting me to be part of this very important conference. It's really an honor to be here. I would guess that in the last few decades, the phrases Federal Reserve System and Financial Inclusion were not often used in the same sentence, but recent events make it quite appropriate to hold a three day conference to discuss how central banks can help achieve a more inclusive economy and financial system. Today, I want to talk about four things. First, a few words about the pandemic and the Fed's response to it, which has increased our attention to issues of inclusion. Second, I want to discuss the views of some of those I will call the ghosts of central banks, central banking's past, because I believe we can find some inspiration there. Then I will turn to new technologies, specifically digital currencies and how that can advance inclusion. And finally, I'll offer a few ideas for further exploration. My comments focus on the United States, but some of the ideas will be relevant for other countries. The Fed's response to the turmoil in financial markets last spring was pathbreaking. The Fed provided liquidity to a broad range of financial markets and bought or stood ready to buy financial assets in a broader range than even 2008. We will never know what might have happened without those actions, but we might have had a serious financial crisis on our hands. But the Fed's actions did not and could not prevent a severe drop in employment and income, particularly for those on the lower rungs of the economic ladder. Congress provided some relief in the form of the CARES Act, and it gave Treasury a war chest with which to support the Fed's interventions. Congress has not been able to provide further relief since March, and we have not contained the virus. So we have had the so called K shaped recovery. Where those of us at this conference and professional and white collar workers generally, assuming we in our families are healthy, are probably experiencing the pandemic as an inconvenience, but not really as an economic hardship. Frontline workers, service workers, blue collar workers, the unemployed, those without savings are suffering much more. The K shaped recovery aggravates longer term trends that have increased the gap between rich and poor and limited social mobility. It also adds to the challenges we face over racial justice. The unemployment rate for black and Latinx workers, for example, has significantly exceeded the rate for white workers throughout the pandemic. I am glad the Federal Reserve did what it did in the spring, especially as someone who helped fight the 2008 crisis. But it's hard not to think that the Fed's actions benefited those of us who hold financial assets disproportionately, and probably contributed to the gap between rich and poor. That makes the question of how does the central bank advance financial inclusion even more relevant? Let's consider small businesses. Business closures, especially for small businesses have been substantial and have been far worse among minority owners. From February to April alone, the number of active businesses, business owners declined by 22%. The declines among black and Latinx business owners were much greater 41% and 32% respectively. The Fed has attempted to address the credit needs of Main Street through the Main Street municipal lending facilities, but use has been quite limited. That's partly a demand issue for many businesses more debt won't bring more consumers. But it's also due to facility design problems. And these facilities have provoked debate. Some of question whether it should be the Fed's job to provide credit to businesses as opposed to liquidity to banks and financial markets. But in my view, Congress directed the Treasury and the Fed to do just that in the CARES Act. If anything, it has been the Treasury's reluctance to fully use the authority it was given and take losses that have hurt this effort. The Treasury has allocated only 195 billion of the 454 billion war chest. The actual investment to date is far less. So to invert a well known phrase, the 454 billion dollar war chest should have come with a label, lose it in order to use it. Now, it's admittedly challenging from an implementation standpoint for the Fed to provide credit to small businesses. But this is where I think we can find some inspiration at least from the ghosts of central banking's past. Consider William McCoon, the principal architect of the sub-treasury plan of the populist movement in the late 19th century. This was decades before the creation of the Federal Reserve. Farmers had great difficulty getting the credit they needed at harvest time to finance the shipment of crops due to an inelastic money supply that was based on the gold standard and dominated by New York banks. Farmers were forced to borrow at usurious rates and often couldn't repay those loans due to successive ways of deflation, which led to despair and failure for many. So McCoon proposed that the US Treasury should create federal warehouses and grain elevators in all agricultural areas at which farmers could store their crops and borrow from the government. The farmer would be paid in fiat currency, which would not be tied to the gold standard. The government would use its full faith and credit authority to increase the money supply at harvest time just when liquidity needs were highest. The plan was a radical democratic idea that was viewed as crazy by the establishment in its day. And the populist never mustered sufficient political force to advance it. But John Maynard Keynes recognized that it anticipated his own analysis. And the populists are generally remembered not for the sub-treasury plan, but for William Jennings Bryan, who collapsed that complex proposal for a more elastic money supply into a simple but eloquent opposition to the gold standard. Bryan was a colorful but unsuccessful democratic nominee for president. Yet his influence and the populist influence was important in the later debate over the creation of the Federal Reserve. In that debate, President Woodrow Wilson had to overcome the bankers who wanted a quote, bankers bank close book, quote, free from any political oversight. He had to persuade Democrats who feared the entity would simply support the money trust of J.P. Morgan and come to the rescue of the New York banks during times of financial stress. He succeeded by insisting on federal control of the board as well as the regional structure we are familiar with today. As well as by persuading his then Secretary of State William Jennings Bryan to publicly support the plan. So imagine if McCoon, Bryan or Wilson could be with us today. Would they be shocked or at least disappointed by the fact that the Fed has bought trillions of dollars and bonds and other financial assets to support financial markets but struggled to help small business. Would they react to the subject matter of this conference by saying, well, yeah, it's about time. So as we discuss how a central bank should promote inclusion, our history can provide some inspiration. Let me turn to the technologies of the future, specifically digital currencies. Surely central bank digital currencies will be part of the future, even if as many have said it's not clear what problem they solve today. While there has been interest in CBDCs for a few years, Facebook's announcement of its intention to create Libra, a global stablecoin, really, as German Jerome Powell said, lit a fire under central banks. And the pandemic has intensified that interest because of the shift to greater digital commerce. How might digital currencies increase financial inclusion? Well, Facebook claimed its mission was to help the 1.7 billion people around the world who lack access to the financial system. And clearly, if Libra was operational and could simply lower the cost of cross border remittances, a $700 billion market, where it typically costs $7, maybe even $11 to send $100 overseas. Poor people, people on the lower rungs of the income ladder would benefit greatly. There has been great skepticism over Facebook's motives concern over its power concerns about the risks of global coin stablecoins generally. But I believe we should design a proper regulatory framework to encourage such private initiatives as I will discuss in a moment. As for CBDCs themselves, one of the most inclusive design possibilities is a direct retail system, in which everyone, not just financial institutions, has an account at the central bank. But at least as of today, there are significant disadvantages to that approach. In particular, there is the risk of disintermediation of the banking system that people withdraw money from commercial banks and park it at the central bank. That could adversely affect credit creation. And it could increase financial instability at precisely the wrong time. People might withdraw more from the banking system as stress increases. There is also the issue of whether we want the central bank to be responsible for the administrative burden associated with direct accounts. But I want to suggest in a moment a slim down version for your consideration. Meanwhile, China is rolling out a two tiered system, where the central bank issues a CBDC to commercial banks and those banks remain the primary interface with consumers. And two tiered systems would appear to avoid the disintermediation risk and administrative burden for the central bank. China's launch of a CBDC, however, appears to be motivated not by financial inclusion, but by a long term desire to reduce the importance of the US dollar in international markets, gain first mover advantages in a new technology, and perhaps exercise greater control over its very own private mobile payments industry. Now we can learn lessons from that industry from the dramatic growth of China's mobile payments industry, which has given people more, which has given more people access to two financial services. It should remind us that there are first technological initiatives we can take well short of launching a full scale CBDC that can advance inclusion. Like simply creating broad brand infrastructure and making sure everyone can afford a smartphone. I have also recently written about the lessons we can learn in how to create a regulatory framework under which private initiatives and digital currencies can proceed by looking at China. There are a number of things they've done that I think are would be relevant to our experience. So on that note, let me turn to offering five ideas for exploration as to how the Federal Reserve might advance inclusion. This is the whiteboarding part of the speech. I'll admit some of these are not fully baked, but I hope they'll provoke some thought. So first, while I support continued CBDC research and development, private stablecoins like Libra may be a faster means to advance inclusion in the short term. But they should only be allowed to operate under a proper and complete regulatory framework, which we do not have today. So could the Fed create that regulatory framework by creating a core CBDC operating system on top of which private firms can build stablecoin applications, much as people build applications to operate on your iPhone. The Fed would design the regulatory standards that must be met to issue a stablecoin back to solely by the US dollar. This would include consumer protection requirements, prudential requirements, standards on use and accessibility of data, privacy, interoperability requirements and financial inclusion goals or metrics. And I also acknowledge that we must address the power, the concentrated power of technological come of large technology platforms, but I'm going to leave that issue aside for today. In any event, I think it's important to try to harness private initiative with proper oversight to advance inclusion through digital currencies. Second, instead of creating Fed accounts for everyone, which raises some fears about disintermediation as well as the administrative burden for the Fed. Let's explore the idea of the Fed offering digital accounts for the underbank and unbanked, who represent 25% of American households. That statistic alone should move us to action. The accounts could have limited features so that those who can sustain a commercial bank account would not want one. This might include a maximum balance amount, maybe even a cap on the number of transactions per month. We talk about a public option when it comes to government provided health care. Well, this could be a public option when it comes to bank accounts. Because of the limited features that take up would be limited and the administrative burden would be minimal and the risk of disintermediation nonexistent. The goal would be to help the underserved gain access to the financial system and graduate over time to a commercial bank account. Third, let's extend the operating hours of the Federal Reserve wholesale payment services, the Fed wire and the National Settlement Service. Those who live paycheck to paycheck constantly face the risk that it can take days for a deposit to check to clear. That can make it hard to pay your bills. People go to check cashing stores because it's a faster way to get money. And while they pay high fees for that, those fees are often less than the overdraft charges they would otherwise incur at a bank. While the Fed has launched its FedNow initiative to achieve real-time payments, that won't be operational until 2023 or 24, even if it is on schedule. In the meantime, let's simply make payments faster, as George Sogan of the Cato Institute and Aaron Klein of Brookings have recently proposed. The Fed system has limited weekday hours and doesn't operate on weekends and holidays. If you increase those hours, interbank clearing of payments would be faster and banks could clear individual checks faster. Now, the Fed is scheduled to increase weekday hours slightly in March, but it could go further. And if the Fed did so, it could also consider mandating banks to clear checks faster. And that would also help those who live paycheck to paycheck. Fourth, recognizing that digital Fed accounts, even on a limited scale, are a ways off. Can the Fed use its regulatory power or the convening power of the regional banks to promote safe accounts? Now, these are the model bank account proposed by the FDIC that is responsive to the needs of the underbanked and unbanked. The account template involves a low balance requirement, a debit card for ATM withdrawals, point of sale transactions, and mobile payments, but no check writing privileges in order to keep bank costs low. And there are no overdraft fees. The FDI study found them to be very successful and having a bank account is a path to financial independence. So could the Fed use its power to promote these in some way? Could they be made part of the scoring for the Community Reinvestment Act, which the Fed has recently proposed to revise? Is there some other way to incentivize banks to provide more of these accounts? I hope we can explore that idea. And fifth, how about a new capital purchase program for small banks so that we strengthen their capital to weather the pandemic and increase their ability to lend to small businesses? Now, Congress would need to repurpose some of the funds allocated to Treasury in the CARES Act toward this use, those funds that it hasn't used to support the Fed. And the Fed would then assist Treasury in the implementation of the program. Small banks account for a disproportionately higher share of small business loans and micro loans, micro loans being those loans less than $100,000. According to a recent Fed study, banks with less than $1 billion of assets held 7.4% of all banking industry assets, but 26% of small business loans and 18.1% of micro loans. The report said this may be because smaller banks are more knowledgeable about local markets, which is important in making risky relationship dependent small business loans. Smaller banks face greater risks than the days ahead because of their disproportionately greater exposure to small business and to commercial real estate. So bolstering their capital might prevent failures or further industry consolidation. The capital purchase program from 2008 was one of the most successful programs in fighting the financial crisis because it provided the capital needed for banks to absorb losses. We also made a profit on it. We know how to implement such a program. We could design a new version that is exclusively available to small banks. The cost to the Treasury would be minimal, given low interest rates. Banks would ultimately pay back the capital and would pay a small dividend rate in the meantime. Capital could be used to offset losses, giving banks better ability to lend, and we could create restrictions so the capital isn't used for inappropriate purposes. Let me close with this thought. As we discuss innovative technologies, exciting new ideas and other intellectually stimulating proposals as to how to advance financial inclusion, let's not forget the relatively simple things that deserve to be prioritized. The Treasury Department distributed approximately 160 million CARES Act payments this past spring. About 35 million of those went by check, which meant the recipients waited at least one extra month and by some estimates up to four months before they had good funds. That is a long time when you are unemployed or lacking in assets. Surely with a financial system as sophisticated as ours, we can and must fix that. Thank you very much.